Income Tax Old Vs New Tax Regime: Comparison of Old Vs New Tax Deductions and Exemptions

Income Tax Old Vs New Tax RegimeIncome Tax Old Vs New Tax Regime: Comparison Between Old Regime vs New Regime, Comparison of Deductions and Exemptions, Factors to Consider When Choosing a Tax Regime. Read to Learn More.

The Income Tax Act in India underwent a significant change with the introduction of the new tax regime in the Union Budget 2020-21.

The new regime, popularly known as the “Optional Tax Regime,” offers taxpayers an alternative to the existing old regime, which has been in place for several decades.

The primary objective of the new regime is to simplify the tax structure, reduce the tax burden, and promote compliance.

Income Tax: Old Tax Regime

The old tax regime, also known as the “Regular Tax Regime,” has been the standard system for income tax calculation in India. Under this regime, taxpayers have the option to claim various deductions and exemptions to reduce their taxable income.

Here are some key features of the old tax regime:

a. Tax Slabs and Rates

The old tax regime follows a progressive tax rate structure, with different tax slabs and rates applicable based on the taxpayer’s age and residential status. The tax slabs in the old tax regime are divided into three categories based on the age of the individual:

Individuals below 60 years of age:

  • Basic Exemption Limit: ₹2,50,000
  • Tax Rebate: Up to ₹12,500 (for total income not exceeding ₹5,00,000)

Resident Senior Citizens (60 to 80 years):

  • Basic Exemption Limit: ₹3,00,000
  • Tax Rebate: Up to ₹12,500 (for total income not exceeding ₹5,00,000)

Resident Super Senior Citizens (80 years and above):

  • Basic Exemption Limit: ₹5,00,000
  • Tax Rebate: Up to ₹12,500 (for total income not exceeding ₹5,00,000)

The basic exemption limit, which is the income threshold below which no tax is payable, varies for each category. The tax rates increase as the taxable income rises, with the highest marginal tax rate currently set at 30% (excluding applicable surcharges and cess).

b. Deductions and Exemptions

One of the primary advantages of the old tax regime is the availability of numerous deductions and exemptions. These include:

  • Standard Deduction from Salary (up to ₹50,000)
  • Leave Travel Allowance (Section 10(5))
  • House Rent Allowance (HRA) Exemption
  • Deductions under Chapter VI-A (Sections 80C to 80U)
  • Interest on Home Loan for Self-Occupied Property
  • Deduction for Donations
  • Set-off of Losses under the Head “Income from House Property”
  • Resident individuals with a total income of up to ₹5 lakh are eligible for a tax rebate of up to ₹12,500.

Note: Deductions under Chapter VI-A: Taxpayers can claim various deductions, such as those for investments in life insurance, provident funds, home loan interest, and specific medical expenses, among others.

c. Losses and Set-offs

Under the old tax regime, taxpayers can carry forward and set off various losses, such as those from house property, business, or capital gains, against their future income, subject to specific rules and conditions.

Income Tax: New Tax Regime

The new tax regime, introduced in the Union Budget 2020-21, offers a simplified tax structure with lower tax rates but fewer deductions and exemptions. Here are the key features of the new tax regime:

a. Key Features of the New Tax Regime

The key features of the new tax regime are as follows:

  • Lower Tax Rates: The new regime provides lower tax rates compared to the old regime.
  • Limited Deductions and Exemptions: Only a few deductions and exemptions are allowed, such as:
    • Standard Deduction from Salary (up to ₹50,000)
    • Deduction for Employer’s Contribution to NPS (Section 80CCD(2))
    • Deduction for Disabilities
    • Deduction for Certain Allowances and Perquisites
  • Basic Exemption Limit: The basic exemption limit under the new tax regime is ₹3,00,000.
  • Tax Rebate: A tax rebate of up to ₹25,000 is available for resident individuals if the total income does not exceed ₹7,00,000.

b. Tax Slabs and Rates

The new tax regime has a revised tax slab structure with lower tax rates compared to the old regime. The basic exemption limit is ₹3 lakh for all individuals, regardless of age or residential status.

Additionally, a tax rebate of up to ₹25,000 is available for resident individuals with a total income of up to ₹7 lakh.

Total Income Slab (₹) Tax Rate
Up to 3,00,000 0%
3,00,001 – 6,00,000 5%
6,00,001 – 9,00,000 10%
9,00,001 – 12,00,000 15%
12,00,001 – 15,00,000 20%
Above 15,00,000 30%

Additionally, surcharge and cess will be applicable over and above the tax rates in both old and new tax regimes. However, a lower surcharge rate is applicable for high net worth individuals, HUFs, Association of Persons, Body of Individuals, and Artificial Judicial Persons in the new tax regime.

c. Deductions and Exemptions

Under the new tax regime, most deductions and exemptions available in the old regime have been removed. However, a few exceptions exist, such as:

  • Standard Deduction: Salaried individuals can claim a standard deduction of up to ₹50,000 from their gross salary.
  • Employer’s Contribution to NPS: Deduction for the employer’s contribution to the National Pension System (NPS) is allowed.
  • Disability-related Exemptions: Exemptions related to transport allowance and conveyance allowance for disabled persons are available.
  • Leave Encashment and Gratuity: Exemptions for leave encashment and gratuity payments are available, subject to certain conditions.

d. Losses and Set-offs

Under the new tax regime, taxpayers cannot carry forward or set off losses from house property, capital gains, or other sources against their future income.

However, business losses can be carried forward and set off against future business income, subject to existing rules.

Related Articles:

Comparison: Old Regime vs New Regime

To better understand the differences between the two regimes and determine which one is more beneficial for you, let’s compare them side by side:

Feature Old Tax Regime New Tax Regime
Tax Rates Progressive tax rates with highest marginal rate of 30% (excluding surcharge and cess) Lower tax rates with highest marginal rate of 30% (excluding surcharge and cess)
Basic Exemption Limit ₹2.5 lakh (individuals below 60 years), ₹3 lakh (senior citizens), ₹5 lakh (super senior citizens) ₹3 lakh for all individuals
Tax Rebate Up to ₹12,500 for total income up to ₹5 lakh (resident individuals) Up to ₹25,000 for total income up to ₹7 lakh (resident individuals)
Standard Deduction Up to ₹50,000 (for salaried individuals) Up to ₹50,000 (for salaried individuals)
Deductions and Exemptions Numerous deductions and exemptions available (e.g., HRA, LTA, investments, home loan interest, medical expenses, etc.) Limited deductions and exemptions available (e.g., employer’s NPS contribution, disability-related allowances, leave encashment, gratuity)
Losses and Set-offs Allowed for various types of losses (e.g., house property, business, capital gains) Limited to business losses only

Comparison of Deductions and Exemptions

To help you understand the differences between the two regimes, let’s compare the deductions and exemptions available under each:

Deduction/Exemption Old Tax Regime New Tax Regime
Standard Deduction from Salary
Leave Travel Allowance (LTA)
House Rent Allowance (HRA)
Deductions under Chapter VI-A (80C to 80U)
Interest on Home Loan (Self-Occupied Property)
Deduction for Donations
Set-off of Losses (Income from House Property)
Deduction for Employer’s Contribution to NPS
Deduction for Disabilities
Deduction for Certain Allowances and Perquisites
Interest on Home Loan (Let-Out Property)
Gifts up to ₹50,000
Deduction for Additional Employee Cost (Section 80J)
Deduction for Family Pension Income (Section 57(iia))
Deduction for Agri Corpus Fund (Section 80CH(2))

Please note that from Assessment Year 2024-25 onwards, the new tax regime has been set as the default regime. Therefore, if you wish to continue using the old tax regime, you must opt-out of the new tax regime by submitting Form 10IA or filing the respective income tax return before the due date.

Procedure to Opt-Out or Re-Enter the New Tax Regime

The procedure to opt out or re-enter the new tax regime depends on whether you have income from a business or profession or not.

For Non-Business Income:

  • The option to switch between the old tax regime or the new tax regime can be exercised while filing the respective income tax return (ITR-1 or ITR-2) on or before the due date specified under Section 139(1).

For Business Income:

  • Form 10IA has been notified for individuals, HUFs, Association of Persons (other than Cooperative Societies), Body of Individuals, and Artificial Judicial Persons to exercise their choice of the tax regime.
  • For Cooperative Societies, Form 10IFA has been notified to opt for the new tax regime from Assessment Year 2024-25 onwards.
  • Please note that for income from business or profession, the option to switch regimes or withdraw from the old tax regime in any subsequent assessment year is available only once in a lifetime.

How to File Form 10IA on the e-filing portal?

The step-by-step process to file Form 10IA on the e-filing portal is as follows:

  • Log in to your e-filing account.
  • Go to “E-file” and click on “File Income Tax Forms.”
  • Select “Form 10IA” and click on “Let’s Get Started.”
  • Select whether you have income under the head “Profits and Gains from Business or Profession” during the assessment year.
  • Confirm the due date applicable for filing your return of income.
  • Verify that once the form is validly filed, it cannot be withdrawn, and ensure you are opting for the intended regime of taxation.
  • Fill in the basic information section and select your option (opting out of the new tax regime or re-entering the new tax regime).
  • Provide additional information, if applicable.
  • Verify the form and provide the declaration.
  • Click on the “Save” button to submit the form.

Factors to Consider When Choosing a Tax Regime

The decision to opt for the old or new tax regime depends on your individual circumstances and the potential tax implications. Here are some key considerations:

Evaluate Your Deductions and Exemptions:

  • If you have significant deductions and exemptions available under the old tax regime, such as HRA, LTA, deductions under Chapter VI-A (80C to 80U), and interest on home loans, it may be beneficial to continue with the old regime.
  • If you do not have substantial deductions and exemptions, the new tax regime with lower tax rates may be more advantageous.

Consider Your Income Level:

  • For individuals with lower income levels, the new tax regime may be more beneficial due to the lower tax rates.
  • For higher income individuals, the old tax regime may be more favorable if they can claim significant deductions and exemptions.

Age and Residential Status:

  • The basic exemption limit and tax rebate vary based on your age and residential status under the old regime.
  • If you are a senior citizen or super senior citizen, the old regime may be more advantageous due to the higher basic exemption limit.

Life Stage and Financial Goals:

  • If you are in the early stages of your career or have significant investment or home loan obligations, the old tax regime may be more suitable.
  • If you are nearing retirement or have limited deductions and exemptions, the new tax regime could be more advantageous.

Consistency and Long-term Planning:

  • For individuals with business income, the decision to switch regimes should be made carefully as the option is available only once in a lifetime.
  • For non-business income, the flexibility to switch regimes annually can be utilized based on your changing circumstances.

It is important to carefully evaluate your financial situation, deductions, exemptions, and long-term goals before deciding on the tax regime that best suits your needs. Additionally, it is advisable to consult with a tax professional or seek expert guidance to make an informed decision.

Conclusion

The introduction of the new tax regime has provided taxpayers with an alternative option for tax computation. While the new regime offers lower tax rates, it comes with the trade-off of fewer deductions and exemptions. The decision to opt for the old or new tax regime is a personal one and should be based on a careful analysis of your income, investments, deductions, and long-term financial goals.

It is advisable to seek professional guidance from a qualified tax consultant or financial advisor to assess your specific situation and determine the most advantageous tax regime for you. Additionally, staying updated with the latest tax laws and regulations is crucial to make informed decisions regarding your tax planning.

Remember, the objective of both tax regimes is to simplify the tax structure, promote compliance, and provide relief to taxpayers. By understanding the nuances of each regime and making an informed choice, you can optimize your tax liability while aligning with your financial goals.

Frequently Asked Questions (FAQs)

Q: Is it necessary for an employee to specify the tax regime to the employer?

A: It is advisable for the employee to specify the preferred tax regime to the employer. However, the employee can switch the regime at the time of filing the income tax return, whichever is more beneficial.

Q: Who cannot switch between the regimes every year?

A: Taxpayers with income from business or profession cannot switch income tax regimes every year. They can exercise this option only once in their lifetime.

Q: What if I am unable to proceed further while filing Form 10IA?

A: If you do not have any business income and are required to file ITR-1 or ITR-2, there is no need to file Form 10IA. You can exercise the option to opt-out or re-enter the new tax regime while filing the respective income tax return on or before the due date specified under Section 139(1).

Q: From which assessment year is Form 10IA applicable?

A: Form 10IA is applicable for individuals, HUFs, Association of Persons (other than Cooperative Societies), Body of Individuals, and Artificial Judicial Persons from Assessment Year 2024-25 onwards.

Form 10IFA is applicable for Cooperative Societies from Assessment Year 2024-25 onwards if they wish to opt for the new tax regime.

Leave a Reply